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What Is Financial Reporting & Analysis?

Financial analysts compile financial accounting reporting and financial analysis reports as part of their sector and company research. Usually with the intent of recommending stocks to investors. Their financial analysis reports aim to ensure that potential investors have an in-depth understanding of the business, its competitive advantages and why it is a good investment.
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Financial analysis reports are a key driver of investor decision-making. Normally, they will include:

Company Overview: a description of what the company does, the industry sector and any competitive advantages.

Investment Essentials: this round-up of the pros and cons of investing in the company and will detail cash flow, liquidity, debt levels and future projections.

Valuation: a calculation of how much the stock is worth.

Risk Analysis: identifying any risks likely to keep the company from achieving the valuation.

Detailed Results: a summary and interpretation of the company's financial statements.

Recommendation: a brief recap of the points in favour and against the company with a buy, sell or hold recommendation.

Who uses financial reporting and analysis? 

Financial analysis and reporting has three key roles and three main audiences:

  1. It is required by law for tax purposes
  2. Investors and shareholders consider financial analysis reports as a key source of reliable information and knowledgeable insight
  3. Management teams rely on it for vital information to make better business decisions.  

What are the benefits of financial analysis?

Internal decision making 

Accurate financial reports, combined with other management reports, enable evidence-based decision-making by management teams across the business. This is likely to include budgeting, sales forecasting, cost analysis and resourcing. Analysis of key operational metrics is essential to make decisions and take informed action to drive efficiencies across the business.

Building strategy 

Financial analysis and reporting are critical to building informed strategies and ensuring the business is profitable and sustainable. Business leaders also need to identify effective ways to grow, diversify and remain competitive in rapidly changing markets. As well as monitoring income and expenses to ensure efficient allocation of resources, financial reporting software can help business leaders identify trends and patterns in real-time.

Managing financial ratios/debt management

Financial ratios can help investors compare complex financial data sets across different reporting periods. At-a-glance performance information, such as working capital ratio or return on equity ratio, can be invaluable tools for accurate benchmarking and real-time decision-making.

Transparency across the company 

Financial analysis and reporting helps organisations to clearly communicate how well they are doing financially. This, in turn, builds trusted relationships with investors, shareholders, employees, and customers. For example, non-profits or public sector bodies need to be accountable for the way they spend the money they have received from donors or taxpayers.

Even in the private sector, shareholders and customers are becoming more involved and critical of the way companies make business decisions. Transparent financial reporting enables companies to demonstrate their beneficial social and environmental impact. Potential customers, particularly in the B2B sector, will also want the reassurance that the company has a strong financial base and long-term future.  

Reducing risks

Accurate and comprehensive financial reporting and analysis can significantly mitigate financial risk. Monitoring KPIs enables management teams to identify performance dips or potentially negative patterns and take pre-emptive action.

Read our article to find out more about Risk Management in Accounting.

What can a business consider from financial reports and analysis? 

Financial reporting analysis can help companies and investors to answer crucial questions about future prospects and direction. Examples include:

  • Can or should we invest further? Financial analysis is an essential component of due diligence and gives insight into whether a company is under-or overpriced in the stock market.
  • How much profit can we expect? This crucial information is impossible to determine without financial statements.
  • Do we have the capital to expand? Companies need know how to balance investing for long-term competitive advantage with short-term cash flow and financial solvency. 

In summary, financial analysis and reporting are versatile tools for organisations of all sizes and in all sectors. They ensure companies stay compliant. However, they also help management teams, investors, shareholders and customers review financial performance and stay informed and connected.

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